ITEM 4.    INFORMATION ON THE COMPANY

 

4.A. HISTORY AND DEVELOPMENT OF THE COMPANY

 

Our company was established on January 3, 2013 as a Bermuda exempted limited partnership registered under the Bermuda Limited Partnership Act 1883, as amended, and the Bermuda Exempted Partnerships Act 1992, as amended. Our company’s head and registered office is 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda, and our company’s telephone number is +441 294 3309.

 

Our company was established by Brookfield Asset Management as its primary vehicle to own and operate certain commercial property operations, including office, retail, industrial, multifamily and other assets, on a global basis. Our partnership’s limited partnership units are listed on the NYSE and the TSX under the symbols “BPY” and “BPY.UN”, respectively.

On April 15, 2013, Brookfield Asset Management completed a spin-off of its commercial property operations to our partnership which was effected by way of a special dividend of units of our partnership to holders of Brookfield Asset Management’s Class A and B limited voting shares. Each holder of the shares received one partnership unit for approximately every 17.42 shares, representing 44.7% of the limited partnership interest in our partnership, with Brookfield Asset Management retaining units of our partnership, Redemption-Exchange Units, and a 1% general partner interest in the Property Partnership through Property Special LP, which was then known as Brookfield Property GP L.P. Our general partner is an indirect wholly-owned subsidiary of Brookfield Asset Management. In addition, wholly-owned subsidiaries of Brookfield Asset Management provide management services to us pursuant to our Master Services Agreement.

 

Although Brookfield intends to maintain a significant interest in our company, Brookfield expects its interest to be reduced over time through mergers, treasury issuances or secondary sales.

 

On August 8, 2013, we effected a restructuring pursuant to which the Property Partnership’s limited partnership agreement was amended to make our company the managing general partner of the Property Partnership and to make Property Special LP, the former general partner of the Property Partnership, a special limited partner of the Property Partnership. This change was made in order to simplify our governance structure and to more clearly delineate our company’s governance rights in respect of the Property Partnership. As a result, the voting agreement between our company and Brookfield, which required Brookfield to exercise certain of its voting rights in respect of the Property Partnership’s former general partner as directed by our company, was terminated and related changes were made to our limited partnership agreement and the Master Services Agreement. Because Brookfield is a party to these agreements, all of the amendments were approved by a special committee of independent directors of the BPY General Partner and the former general partner of the Property Partnership. The economic interests of our company and Brookfield in the Property Partnership were not affected by these changes. See Item 10.B. “Memorandum and Articles of Association - Description of Our Units and Our Limited Partnership Agreement” and “Memorandum and Articles of Association - Description of the Property Partnership Limited Partnership Agreement”.

 

In November 2013, we acquired additional shares and warrants of GGP for total consideration of $1.4 billion . As a result of the acquisition, our fully-diluted ownership interest in GGP was increased to 32% , assuming the exercise of all of the outstanding warrants, or approximately 28% on an undiluted basis. Prior to this transaction, Brookfield Asset Management managed a 43% fully-diluted interest in GGP on behalf of a consortium that was formed to invest in the recapitalization of GGP in March 2010. As part of the consortium, our fully-diluted interest in GGP was 25% . In November 2013, we acquired interests in GGP from certain consortium members, as well as all of the interests in GGP that were distributed to Brookfield in payment of its carried interest entitlement of approximately $529 million , as manager of the consortium. In total, our company acquired 53 million shares of GGP and warrants to acquire an additional 26 million shares, as well as 1.1 million common shares of Rouse. The acquisition was funded through the issuance of $435 million of our units to institutional investors and $996 million of Redemption-Exchange Units to Brookfield. Following the equity issuances, Brookfield’s interest in our company (on a fully exchanged basis) decreased from approximately 92% to approximately 89% .

 

On June 9, 2014, pursuant to a plan of arrangement, or the Arrangement, we completed the acquisition of all of the common shares of Brookfield Office Properties Inc., or Brookfield Office Properties, that we did not already own. The Arrangement followed our successful offer, or the Offer, to acquire common shares of Brookfield Office Properties. Under each of the Offer and the Arrangement, shareholders of Brookfield Office Properties were able to elect to receive, for each Brookfield Office Properties common share, one of our units or $20.34 in cash, subject to pro-ration. Pursuant to the Offer, which commenced on February 12, 2014, we acquired approximately 89% of the common shares of Brookfield Office Properties that we did not own on a fully diluted basis and in the Arrangement we acquired the remaining common shares that we did not own. As a result of the Offer and the Arrangement, we now own 100% of the issued and outstanding common shares of Brookfield Office Properties. These shares were delisted from the TSX and the NYSE on June 10, 2014 and June 20, 2014, respectively. In connection with the Offer and

the Arrangement, we issued units of our company (and Exchange LP issued Exchange LP Units which are exchangeable into our units at any time), decreasing Brookfield’s interest in our company (on a fully exchanged basis) from approximately 89% to approximately 68% .

 

On December 4, 2014, the Property Partnership issued $1.8 billion of Class A Preferred Units to the Class A Preferred Unitholder. Assuming the exchange of the Class A Preferred Units and Redemption-Exchange Units in accordance with the Preferred Unit Exchange Mechanism and the Redemption-Exchange Mechanism, respectively, the Class A Preferred Unitholder will own an approximate 9% interest in our company.

 

In April 2015, a joint venture owned 50% by our company and 50% by the Class A Preferred Unitholder, or the Canary JV, acquired 100% of London’s Canary Wharf through its £2.6 billion acquisition of Songbird Estates plc, or Songbird, and its acquisition of the share capital of Canary Wharf Group plc, or Canary Wharf, not owned by Songbird.

4.B.      BUSINESS OVERVIEW

 

Overview of our Business

 

Our partnership is Brookfield Asset Management’s primary public entity to make investments in the real estate industry. We are a globally-diversified owner and operator of high-quality properties that typically generate stable and sustainable cash flows over the long term. Our goal is to be a leading global owner and operator of real estate, providing investors with a diversified exposure to some of the most iconic properties in the world and to acquire high-quality assets at a discount to replacement cost or intrinsic value. With approximately 14,000 employees involved in Brookfield Asset Management’s real estate businesses around the globe, we have built operating platforms in various real estate sectors, including:

Through these platforms, we have amassed a portfolio of premier properties and development sites around the globe, including:

Our diversified portfolio of high-quality office and retail assets in some of the world’s most dynamic markets has a stable cash flow profile due to its long-term leases. In addition, as a result of the mark-to-market of rents upon lease expiry, escalation provisions in leases and projected increases in occupancy, these assets should generate strong same-property NOI growth without significant capital investment. Furthermore, we expect to earn between 8% and 11% unlevered, pre-tax returns on construction costs for our development and redevelopment projects and 20% on our equity invested in Brookfield-sponsored real estate opportunity funds. With this cash flow profile, our goal is to pay an attractive annual distribution to our unitholders and to grow our distribution by 5% to 8% per annum.

Overall, we seek to earn leveraged after-tax returns of 12% to 15% on our invested capital. These returns will be comprised of current cash flow and capital appreciation. Capital appreciation will be reflected in the fair value gains that flow through our income statement as a result of our revaluation of investment properties in accordance with IFRS to reflect initiatives that increase property level cash flows, change the risk profile of the asset, or to reflect changes in market conditions. From time to time, we will convert some or all of these unrealized gains to cash through asset sales, joint ventures or refinancings.

 

Our Business Strategy

 

Our strategy is to be the leading globally-diversified owner and operator of commercial properties. Due to the cyclical nature of the real estate industry, we believe that a real estate portfolio diversified by property type and geography will perform consistently over time. Furthermore, since property valuations fluctuate considerably based on market sentiment and other factors, we believe that the flexibility to shift capital to sectors and geographies that are out of favor will enable us to earn premium returns on the capital that we invest.

 

We are currently targeting investments across our various operating platforms. In summary, our strategy is to acquire high-quality assets on a value basis, utilize our operating platforms to add value through pro-active management, develop “best-in-class” properties at a discount to asset valuations, recycle capital for re-investment in new opportunities and finance on a non-recourse basis with investment grade metrics.

 

 

Utilize our operating platforms to add value through pro-active management

 

Develop “best-in-class” properties at a discount to asset valuations

 

Recycle capital for re-investment in new opportunities

 

 

Finance on a non-recourse basis with investment grade metrics

 

 

For opportunistic transactions, our strategy is to pursue acquisitions through private funds and/or consortium arrangements with institutional investors in order to manage our level of exposure to these higher risk investments. Brookfield Asset Management has a strong track record of leading such consortiums and partnerships.

 

Competitive Strengths

 

We believe that a number of competitive strengths differentiate us from other commercial real estate companies.

Development of our Business

 

Brookfield Asset Management and its predecessor companies have been active in various facets of the real estate business since the 1920s. Canadian Arena Corporation, the predecessor company to Brookfield Office Properties, built the Montreal Forum in 1924 to provide facilities for hockey and other sporting and cultural events and its earnings were derived principally from the ownership of the Montreal Forum and the Montreal Canadiens of the National Hockey League until the sale of the hockey franchise in 1978.

 

In 1976, Brookfield expanded its real estate interests by acquiring a controlling interest in one of Canada’s largest public real estate companies. The steady escalation in commercial property values over the next ten years enabled the capital base to expand. Brookfield took advantage of falling real estate values during the recession of the early 1990s to upgrade and expand its directly owned commercial property portfolio. In 2003, Brookfield made its first investment outside of North America in the United Kingdom. Brookfield further expanded outside of North America in 2007 by making property investments in Australia. In 2014, Brookfield further broadened its geographic reach with investments in China and India.

 

The accumulation of our portfolio of assets was completed through various corporate and property purchases, including the following acquisitions (with the square footage described as at the time of such initial acquisitions):

 

Operating Platforms

 

Our business is organized in three operating platforms, with assets as of December 31, 2015 as set forth in the diagram below. The capital invested in these operating platforms is through a combination of: direct investment; investments in asset level partnerships or joint venture arrangements; participation in private equity funds and consortiums; and the ownership of shares in other public companies. Combining both publicly-listed and private institutional capital provides a competitive advantage in flexibility and access to capital to fund growth.

Office Platform

 

Brookfield Property Partners is a global leader in the development, ownership and management of premier office properties. Our office holdings primarily consist of Brookfield Office Properties, of which we own 100% of its common equity, and our 50% interest in Canary Wharf. Our office portfolio consists of 261 properties comprising 123 million square feet under management and a total of 31 million square feet of development potential. Our properties are primarily located in commercial business districts in some of the world’s leading cities, including New York, London, Los Angeles, Washington, D.C., Sydney, Toronto, and Berlin.

Within our office platform, we remain focused on the following strategic priorities:

 

Our core office portfolio occupancy stands at 92.2% leased at December 31, 2015 and reflects average in-place net rent of $34.05 compared to average market net rent of $43.09 , allowing for 27% potential to capture on higher rents on the upcoming expiration of leases.

 

Another important characteristic of our office portfolio is the strong credit quality of our tenants. We focus on tenant credit quality in order to ensure the long-term sustainability of rental revenues through economic cycles. The following list shows major tenants in our office portfolio by leased area and their respective credit ratings and lease commitments as at December 31, 2015 .

 

Another important strategy for our office platform is to sign long-term leases in order to mitigate risk, reduce our overall re-tenanting costs and ensure stable and sustainable cash flows. As at December 31, 2015 , the average lease term of our office platform was 7.8 years, compared to 7.6 years at December 31, 2014 . We typically commence discussions with tenants regarding their space requirements well in advance of the contractual expiration.

 

A portion of our office platform is owned through joint venture, partnership, consortium or other arrangements with institutional partners. Prospectively, as we recycle capital, our preference is to sell down interests in assets to institutional partners and to continue to manage the assets on behalf of ourselves and the investors. We believe that this strategy enables us to enhance returns on our capital through associated fees, which represent an important area of growth. These types of transactions allow us to earn the following categories of fees:

 

Our development pipeline is a significant component of value of our office platform, and we expect this pipeline to contribute significantly to earnings and provide attractive returns on capital upon stabilization. As at December 31, 2015, we held interests in centrally located office development sites with total development potential of 31 million square feet in the United States, Canada, Australia and Europe.

We classify our office development sites into three categories: (i) active development, (ii) active planning and (iii) held for development. Of the approximately 31.2 million square feet in our office development pipeline, 8.5 million square feet are in the active development stage, 14.2 million square feet are in the active planning stage and 8.5 million square feet are held for future development. With all of our development sites, we proceed with construction when our risk adjusted return hurdles and preleasing targets have been met.

Retail Platform

 

As at December 31, 2015 , our retail platform is primarily comprised of our 29% ownership interest in GGP through public ownership ( 34% on a fully-diluted basis, assuming all outstanding warrants are exercised) and 34% ownership interest in Rouse, and interests in retail assets in Brazil. As at December 31, 2015 , our retail portfolio consisted of interests in 173 regional malls and urban retail properties containing over 155 million square feet in the United States and Brazil and an over $365 million retail mall redevelopment pipeline (on a proportionate basis).

 

Our primary objective is to be an owner and operator of best-in-class malls that provide an outstanding environment and experience for our communities, retailers, employees and consumers. The strategy for our retail platform includes:

 

In 2015 our retail properties reported a combined average of $546 in tenant sales per square foot. During this same period, the spread between the rent paid on expiring leases and the rent commencing under new leases on a suite-to-suite basis in our retail portfolio increased by 23% , demonstrating our strong same-property growth potential.

 

Competition within the retail sector is strong. We compete for tenants and visitors to our malls with other malls in close proximity as well as online retailers. In order to maintain and increase our malls’ competitive position within its marketplace we focus on the following:

 

We believe the high quality of our regional malls enable us to compete effectively for retailers and consumers.

Other Segments

Through investments in Brookfield-sponsored real estate opportunity funds created to earn attractive returns, we have an interest in various opportunistic real estate sectors around the globe including industrial, multifamily, hospitality and triple net lease. Our ownership in these holdings ranges from 13% to 52%.

 

Industrial

 

Our industrial platform consists of approximately 55 million square feet of industrial space across 201 properties, primarily consisting of modern logistics assets in North America and Europe, with an additional 4 million square feet currently under construction and a land portfolio with the potential to build 45 million square feet of industrial properties. Our industrial strategy is to acquire older generation logistics properties that we can redevelop into state-of-the-art product. We also seek to selectively develop projects in supply constrained markets that are critical to the global supply chain. We leverage our long track record of successfully entitling land in these markets and our global relationships with retailers and other logistics companies to negotiate anchor leases to support such projects. Our land bank is comprised of well-located sites near major markets and transport routes in North America, Europe, the Middle East and China.

 

Multifamily

 

Our multifamily platform consists of 137 properties with approximately 38,900 multifamily units across the United States. The majority of these apartments are managed by Fairfield Residential Company LLC, or Fairfield, which is 65% owned by Brookfield Asset Management. Fairfield is one of the largest vertically-integrated multifamily real estate companies in the United States and is a leading provider of acquisition, development, construction, renovation and property-management services. We aim to selectively develop Class A properties in high growth, supply-constrained markets. Due to institutional demand for these types of properties, acquisition opportunities are scarce. We leverage our long track record of successfully entitling land for development of multifamily properties and managing construction in order to maximize returns. We also seek opportunities to redevelop well-located, older assets. We target Class B assets that we can acquire at a significant discount to replacement cost. We typically invest $6,000 to $10,000 per door to upgrade apartments and common areas with amenities that are in demand in today’s market. We seek to earn an attractive return on this capital by raising rents, which are still a significant discount to new product.

 

Hospitality

 

Our hospitality platform consists of interests in 27 hospitality assets with approximately 18,000 rooms across North America, Europe and Australia. Our North American hotel investing activities are conducted through Thayer Lodging, a leading global hospitality investment company, with more than two decades of experience in creating value from owning and operating hotels and in the U.K. through Center Parcs. Our strategy is to employ a disciplined approach to asset selection and target investments with significant value creation opportunities. We seeks to invest in hotels and hospitality related ventures in which the company can use its operational expertise to add value. These strategies include, but are not limited to, renovations, repositioning, rebranding, management modification, channel distribution management, expense control and creative capital structuring.

 

Triple Net Lease

Our triple net lease platform consists of over 300 properties that are leased to automotive dealerships across the United States and Canada on a triple net lease basis. Our triple net lease platform is managed through Capital Automotive, a company focused on providing highly tailored sale-leaseback capital to the automotive retail industry since 1997. Through custom tailored real estate finance, our strategy is to assist automotive dealer groups in growing their organizations, acquiring new locations, upgrading existing facilities, constructing new stores, and facilitating estate planning and partner buyouts.

 

Distribution Policy

 

Our distribution policy is to retain sufficient cash flow within our operations to cover tenant improvements, leasing costs and other sustaining capital expenditures and to pay out substantially all remaining cash flow. In order to finance development projects, acquisitions and other investments, we plan to raise external capital. We believe that a payout ratio of 80% of our FFO should accomplish this objective. We have invested a substantial amount of capital in development and redevelopment projects primarily in our office and retail platforms. Once we realize stabilized cash flow from these initiatives, we expect the growth in our payout to meet its target range of 5% to 8% per annum.

 

We established our initial distribution level and our targeted distribution growth rate based on projections of the amount of FFO that we will generate in the short to medium term. These projections reflected the in-place cash flow of all of our investments and our capital investment plans. In a number of our operating entities, we are retaining operating cashflow for reinvestment. As a result, we are required to finance, in the short term, payment of our distributions to our unitholders. To maintain our distributions at the current level, we have a number of alternatives available to us, including (a) using borrowings under our committed revolving credit facilities; (b) electing to accrue and/or waive distributions to be made in respect of the Redemption-Exchange Units that are held by Brookfield Asset Management in accordance with the Property Partnership’s limited partnership agreement; (c) paying off all or a portion of the fees owed to the Service Providers pursuant to the Master Services Agreement through the issuance of our units and/or Redemption-Exchange Units; (d) paying of any equity enhancement distributions to Property Special LP through the issuance of Redemption-Exchange Units; and (e) utilizing distributions from other operating entities from cash flow from operations, asset sales and/or refinancings. We are not a passive investor and we typically hold positions of control or significant influence over assets in which we invest, enabling us to influence distributions from those assets.

 

On February 3, 2016, the Board of Directors of the BPY General Partner increased the annual distribution on our units to $1.12 per unit. Despite our projections and the alternative methods available to maintain our distribution level, there can be no assurance that we will be able to maintain an annual distribution of $1.12 per unit or meet our target growth rate. Based on amounts received in distributions from our operating entities and our projected operating cash flow from our direct investments, our proposed distributions are significantly greater than such amounts.

Additionally, our ability to make distributions will depend on a number of factors, some of which are out of our control, including, among other things, general economic conditions, our results of operations and financial condition, the amount of cash that is generated by our operations and investments, restrictions imposed by the terms of any indebtedness that is incurred to finance our operations and investments or to fund liquidity needs, levels of operating and other expenses, and contingent liabilities. Furthermore, the Property Partnership, the Holding Entities and our operating entities are legally distinct from our company and they are generally required to service their debt and other obligations, such as distributions to Preferred Unitholders, before making distributions to us or their parent entity as applicable, thereby reducing the amount of our cash flow available to pay distributions on our units, fund working capital and satisfy other needs.

 

Competition and Marketing

 

The nature and extent of competition we face varies from property to property and platform to platform. Our direct competitors include other publicly-traded office, retail, industrial, multifamily, hospitality and triple net lease operating companies; private real estate companies and funds; commercial property developers and other owners of real estate that engage in similar businesses.

 

We believe the principal factors that our tenants consider in making their leasing decisions include: rental rates; quality, design and location of properties; total number and geographic distribution of properties; management and operational expertise; and financial position of the landlord. Based on these criteria, we believe that the size and scope of our operating platforms, as well as the overall quality and attractiveness of our individual properties, enable us to compete effectively for tenants in our local markets. We benefit from using the “Brookfield” name and the “Brookfield” logo in connection with our marketing activities as Brookfield Asset Management has a strong reputation throughout the global real estate industry.

 

Governmental, Legal and Arbitration Proceedings

 

Our company has not been since its formation and is not currently subject to any material governmental, legal or arbitration proceedings which may have or have had a significant impact on our company’s financial position or profitability nor is our company aware of any such proceedings that are pending or threatened.

 

We are occasionally named as a party in various claims and legal proceedings which arise during the normal course of our business. We review each of these claims, including the nature of the claim, the amount in dispute or claimed and the availability of insurance coverage. Although there can be no assurance as to the resolution of any particular claim, we do not believe that the outcome of any claims or potential claims of which we are currently aware will have a material adverse effect on us.

 

Regulation

 

Our business is subject to a variety of federal, state, provincial and local laws and regulations relating to the ownership and operation of real property, including the following:

 

 

These laws and regulations may change and we may become subject to more stringent laws and regulations in the future. Compliance with more stringent laws and regulations could have an adverse effect on our business, financial condition or results of operations. We have established policies and procedures for environmental management and compliance, and we have incurred and will continue to incur significant capital and operating expenditures to comply with health, safety and environmental laws and to obtain and comply with licenses, permits and other approvals and to assess and manage potential liability exposure.

 

Environmental Protection

We pride ourselves on contributing positively to the communities in which we operate. This means we continually strive to minimize our impact on the environment, while balancing the need for economic growth for the company and our communities. With over 100 years of operating experience across asset classes, we have built a track record of achievement and recognition for our sustainability efforts. The initiatives we undertake and the investments we make are guided by our core set of values around sustainable development. We: